FATF publishes final version of its guidance for the crypto industry

The Financial Action Task Force (FATF) published a revised and refined version of its guidelines for the crypto industry. The organisation set standards for the DeFi and NFT sectors.

The FATF first published its guidance in 2019. Back then, bitcoin exchanges and other providers of virtual assets (VASP) were required to comply with anti-money laundering and counter-terrorism financing rules, similar to traditional financial institutions.

In particular, industry participants were required to exchange data on users when they carry out transactions between exchanges. In June 2021, the FATF noted that most jurisdictions had not yet implemented these requirements and urged countries to accelerate the process.

To develop the new version of the guidance, the FATF reviewed implementation experience as well as comments from industry participants.

In the updated guidance, the FATF urged supervisory authorities to be flexible at the initial stage of implementing the requirements. The organisation acknowledged that VASPs and other market participants face difficulties integrating the new systems required to ensure compliance.

«We recognise that building tools to ensure compliance requires significant effort. And perhaps VASPs will need some time to invest in the technologies required to meet the requirements», — said FATF analyst Ken Menz in an interview CoinDesk.

The organisation also noted that state regulators should interpret the definitions used by companies broadly and classify them based on the services offered. In its view, this is necessary to effectively combat illicit financial activity.

«Countries should not classify companies on the basis of the nomenclature or terminology that they use to describe their activities or the technology they employ. The obligations under the FATF standards depend on the financial services offered and do not take into account a company’s operational model, its technological tools, design or other operational characteristics», the document says.

According to the FATF, a virtual asset (VA) is not simply a digital representation of value. This entity must also have a tradeable component that enables the transfer of value.

NFTs are not included in this asset class. However, if these tokens are used for payments or investment purposes, they should be regulated in accordance with FATF recommendations:

«Some NFTs that do not resemble a VA may fall under their definition if they are used in payments or investment purposes in practice. Other NFTs are digital representations of financial assets that are already covered by the FATF standards. Therefore they are excluded from the VA definition, but fall under the standards as a form of financial asset».

The FATF’s definition of VASP covers «any natural or legal persons», acting on behalf of other legal or natural persons, who perform:

• exchanging VA for fiat or other digital assets;
• transferring VA;
• «holding and managing VA or instruments enabling the control of VA»;
• «providing financial services related to the offering and/or sale» of VA by issuers.

The clarification states that dapps are not VASP, since the proposed standards do not apply to base software. At the same time, developers, owners, operators or other persons who retain «control or sufficient influence over the DeFi mechanisms» are highly likely to fall into such category.

FATF emphasised that jurisdictions will need to continually assess new projects and the degree of involvement by leadership. The document states that many of them use the word «decentralised», although there is some natural or legal person who can be held to account.

«Situations where DeFi projects call themselves decentralised, while in reality there is a person with control and sufficient influence, are quite common. Jurisdictions should apply the VASP definition without regard to self-description», the guidance says.

In July 2021, FATF called the efforts to regulate the cryptocurrency industry insufficient.

Updated Guidance VA VASP by ForkLog on Scribd

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